Hi there I am so happy I found your website, I really found you by accident, while I was looking on Askjeeve for something else, Anyhow I am here now and would just like to say cheers for a tremendous post and a all round entertaining blog (I also love the theme/design), I don’t have time to browse it all at the minute but I have book-marked it and also added in your RSS feeds, so when I have time I will be back to read a great deal more, Please do keep up the excellent work.

I have a “stock transfer gift” question: If the value of the stock transfered is under the $13,000 “tax free” gift threshold, will the gift recipient be subject to tax when the shares are sold? It seems that if the value of the shares changes from the time of the gift to the actual sale date then a capitol gain (or loss) would occurr, so taxes on any increase in value would be owed, not on the total sale, is that correct?

You are confusing gift tax rules with income tax rules. The gift tax rules provide that the maker of a gift of a present interest gift of $13,000 will be eligible for the annual donee exclusion. This allows for the transfer of up to $13,000 to as many donees as the maker chooses to make in any one year. Such gifts do not use up any of the maker’s unified credit currently $5,120,000.
From an income tax perspective, the donee receives the gift with a carryover basis. The carryover over basis is what was paid for the gift. So if say the donor had paid $5,000 for the stock and you then sold it for $13,000 you would have a capital gain of $8,000.

Hi Mr. Fromm:
My LLC needs $1 to $2M in early stage growth capital, so we’re putting out a PPM. Our media company has sales around $2million annually (a little profit) and has a proven concept. This would be our first round. We were advised that we need to convert to a C-Corp to get any investors interested. Is this the case? Is it absolutely necessary? What about Angel investors and private investment?
What might the tax consequences be?

We are really so busy trying to keep the business running and collect on invoices and everything else, that I don’t want to do any unnecessary work, nor rack up any unnecessary legal bills.
thanks you

The advice you received is valid that most investors would insist on a C-corporation arrangement. Regular C corporations allow for various levels of stock owenrship and preferences and the investors you mention are more used to this arrangement. It is not absolutely necessary since an LLC can be structured with various participation interests and preferences. However, this makes for a very complicated operating agreement revision.
As for the tax consequences, it is beyond the scope of this general Q&A. Any answer is heavily dependent on the facts and how the deal is structured.
As to doing unnecessary work and racking up legal bills, you need to be realistic here. These financing arrangements are time consuming and costly; that is if you want this thing to be done right. Remember, there is a real difference in goals and financial considerations between you and any investor. Negotiation, contract language drafting and structuring are essential so that you do not give up too much to get this additional capital. Bottom line: You are going to need tax/corporate counsel to be your advocate and to structure any deal in a way that is most favorable to your interests.
Hope this helps and if you want to talk more about this do not hesitate to contact me at 215-735-2336.
Best to you
Steve

I really have to echo Steven’s advice that you get an Estate Attorney on your side as soon as possible. It’s always difficult when dealing with these matters and your family members but if there is something going on behind your back, you need to stop it from happening rather than trying to fix it later.

Hello,
My mother (who lived in PA) passed away in Oct ’10. My sister was appointed by my mother, the executor. I asked for a copy of the will and never received one. I realize I can obtain a copy after the will goes to probate, which it hasn’t yet. Aren’t the beneficiaries (myself and my 4 daughters) entitled to a copy of the will in a certain amount of time? My sister has changed the locks of my mothers house preventing us from seeing exactly what was there, fearing she is selling everything and not recording it properly to the estate. What are my legal rights in this situation? Do you recommend getting a lawyer such as yourself?

Generally, in PA the filing of a will starts the notice to beneficiary deadlines. Actually, your sister has no right to do anything as the executrix until she files the will and obtains letters testamentary from the register of wills. So any actions she is now taking are not as a legally named executrix. Having said that it should be pointed out that changing locks to real estate of an estate is generally a prudent thing to do. So it appears that you may have some trust issues with her that may be justified, but it is hard to tell based on the facts you lay out. If you have mistrust then you really need to discuss your concerns in a face to face meeting with an estates lawyer. Retaining an estates lawyer to protect your interest and your siblings against an executrix that cannot be trusted is always a prudent course of action. Her knowing that you have legal counsel watching her every action may prove to be the deterrent you need to prevent her from looting the estate.

Luis–Although term life insurance traditionally has been viewed as having only one unique income tax attribute, i.e., exclusion of death benefits, IRS issued two revenue rulings earlier this year that point to interesting possibilities for those whose policy term has several years to run. In Rev. Rul. 2009-13, the Service confirmed that a term life insurance policyholder can receive the benefit of the preferential long-term capital gain rates on his/her sale of a term policy in a secondary market. This could be helpful to a seller holding a term policy who no longer needs the coverage due to changed circumstances, e.g., children have completed their education and are self-sufficient, unexpected wealth windfall, divorce, etc. Of course, this tax benefit could disappear with repeal of the preferential tax rates. Anyone contemplating such sale should seek advice of a qualified tax professional as well as someone with expertise in valuing his/her policy.

Robert , this is a great strategy and is probably not known to many clients or practitioners, for that matter. This little known strategy could really work terrifically in the right situation. This is another reason why clients need to consult with a team of experienced professionals who can bring their separate and unique skills and knowledge to solve their clients estate plan riddle.

Great advice you are receiving. One comment to add…. By working with a financial advisor and attorney together, you will be able to obtain the solution for you. By that I mean, your life insurance, wills and ownership of assets needs to be coordianted to meet your speciifc objectives. I have worked with families like yourself in NYC for over 13 years.

When looking for additional coverage, have your financial advisor look at all insurance carriers for competitive quotes from creditible carriers. If you choose term isurance you want to review the conversion features into a permanent policy. The benefit of this feature will provide some flexibility in future if you decide to continue life insurance coverage but the condition of your health may change.

I have 2 children and 1 on the way. It feels good to know they are going to be provided for.

I believe Luis is getting sound advice all around. 2 points on the preceding entries. First, depending on the current and anticipated size of the Luis’ estate, it may or may not be most beneficial to have the policy owned in trust. That depends on many factors including whether it has cash value that may be part of his overall saving plan and whether or not he is likely to ever face an estate tax problem in the first place. Second, when shopping for term it is important that it be convertible but it is also important to consider the strength of the company and the products that it is convertible to. A competitive term product that converts to an undesirable permanent product is no bargain unless you are buying it for short term needs.

I’ll agree with you wholeheartedly, Steven. As a Financial Advisor myself, I can say that as a group we tend to like to do what we do… Plan! But with an estate of any size, I’ve found that the best and most complete work comes when the Advisor and the Attorney are working closely together. Usually, the better the teamwork by these two key advisors, the better the planning.

As for Luis, we’re clearly working with limited information so it’s difficult to be precise, but I might suggest he look at some permanent coverage which builds cash and will never lapse. When we know that less than 1/4 of 1% of all death benefits get paid from term insurance, I tend to limit it’s use. But I do understand the low cost of term makes additional coverage possible, so I’ve found that some combination of term and permanent life insurance can work well.

Kent, you raise some great points. Most importantly, the factual setting and family needs really dictate what is the appropriate plan and what insurance is needed to effectuate such plan. So as advisors our first step is to make sure of the facts, the clients needs and goals for his wealth and family.

I live in New York City, I am 40 years old, and I am in good health. Three years ago I took out a 30 year level term policy with a value of 1 million. I plan on taking out additional life insurance coverage so that my wife and three boys, all under the age of four, will be taken care of. My question is regarding the additional life coverage. Putting aside the premium cost when should I take out the additional coverage? If I take out another 30 year term this year it would only add 3 1/2 years of additional life coverage. Should I wait, say, another 3 years so that the additional life policy covers 7 more years? Is this considered life insurance laddering like CD laddering?

Luis: It is commendable that you are protecting your family. These are good questions since insurance coverage is confusing to most people. The very first and most important question you must ask is the following: Why am I buying insurance?

It would seem that with little children your needs are to cover their education and well being if you die before they become adults. If your children go to college and graduate school, you would need insurance for the next 25 to 28 years. After they are independent, how much insurance do you really need?

The second reason you are purchasing insurance is to replace your income if you were to die and your wife could not work. You did not say how much additional coverage you are thinking about purchasing, but you should think about having enough insurance to cover your wife for your missing income and the increased educational expenses that may arise.

Now to answer your questions about the various time frame issues concerning the insurance. In my experience, you should focus on your current needs. If you need this extra insurance to cover your wife and children buy it now. Who knows what will be your situation in 30 years. By then you will probably have built up your personal wealth, so life insurance may be not be needed at all. Perhaps, you may need it for estate taxes if the size of your estate is large enough, but this need for insurance is based upon a lot of variables. My best advice: Cover your current known risks.

Finally, you did not ask how this insurance should be owned and who should be named beneficiaries? First, be aware that the IRS includes insurance proceeds in your taxable estate (as do some states, Pennsylvania does not tax insurance proceeds), so if your other assets are large enough you need to do some estate tax planning by utilizing various trust (unified credit trusts, marital deduction trusts and/or irrevocable life insurance trusts) or other strategies. This area is beyond the scope of this discussion but may be of critical importance.

Secondly, generally, insurance should be placed in trust to provide professional management and creditor protection. (See my Michael Jackson article at this blog.) A trust may prevent your wife from squandering the insurance proceeds. If she marries again and later dies or divorces, your family may lose some of this insurance. A trust would also cover your family if both you and your wife die suddenly and simultaneously. There are other advantages and considerations concerning trusts that are beyond the scope of this general discussion.

Luis, there is a lot here to consider and you need an experienced estate planning attorney to guide you in your specific situation to develop an estate plan that meets your family and financial needs.

(These comments should not be relied on as legal advice. Please see the Disclaimer at this blog for a more complete explanation as to why readers are cautioned to seek a lawyer trained in their state and not rely on this post.)

Hi Luis,
While I agree with Steven that you should take care of current needs, I have seen much waste created by short term planning that is focused only on a singular issue. Life insurance planning should be part of a bigger picture. There are many unknowns going forward and as Steven points out, it is impossible to know what your family’s income or estate planning needs will be in 30 years. That said, how and where you are saving money, the amount and nature of your current assets, future inheritance, all play a part in determining the type and duration of life insurance that you buy. Disability is also a risk that should be protected against (particularly long term).

I believe you need a qualified financial advisor even before worrying about the legal aspects of your plan. Of course, you should have wills and if those are not in place that should be addressed immediately.

Barry, makes some great points. The most important point is that comprehensive planning should be done with input from a qualified team of professionals to coordinate their efforts and expertise.

However, there is one subtle point to be made about the last paragraph of his comments. It is suggested that you should do the legal and financial part simultaneously. If you were to buy insurance without discussing this with an estate planning attorney, you may miss out on some estate tax savings. For example, if you buy insurance in your own name and then afterword you go to your attorney who recommends an Irrevocable Life Insuance Trust, you would have to transfer the policy to this irrevocable trust. If you died within 3 years of the transfer, the IRS would include the insurance in your taxable estate, even though it is in trust at your death. (This is the so-called “3 year rule” under Section 2035 of the Internal Revenue Code.) That could be a disasterous tax result to your family and diminish available assets to your survivors. So to my way of thinking, you need to simultaneously consult with an estate planning attorney and your financial planner. They would act like a team in putting together a comprehensive estate planning program.